Dow Transports Defined-Risk Short Setup

IYT has additional weakness ahead

As stocks cratered into the end of the month of May, plenty of sectors, groups, and individual stocks left nasty bearish reversals behind on their daily charts. One group of stocks that I have been eyeing for several months to confirm or deny shortable weakness has been the Dow Transportation stocks as represented by the iShares Dow Jones Transportation Index Fund (IYT).

On the longer-term chart below, the transports completed an important breakout in January, past significant multi-year resistance around the $99 – $101 area. The breakout happened as the group began a steep rally off the November 2012 lows, which first led to a break out past a medium-term consolidation period, and ultimately past multi-year resistance. To be sure however, the rally off the November lows was steep as it lifted the group by 30% over the course of six months, into mid May 2013.

Click to Enlarge As Fed Chief Ben Bernanke gave his latest testimony on May 22nd and the broader market came off its highs, so too did the iShares Dow Jones Transportation Index Fund with a clearly visible bearish candle. Given the still strong trend that was intact however, it seemed at the time somewhat premature to lean against the short side of this exchange traded fund. With last Friday’s confirmation selling below a first line of support near $113 however, the group now looks vulnerable for at least another 2.50% – 4.50% of downside in the near term.

Click to Enlarge More specifically, the 61.80% retracement of the move off the April 15 lows, the latest upswing, near $109.60 offers an interesting first target to me, while a second support level sits near $107.50.

Looking at some of the components of the iShares Dow Jones Transportation Index Fund on the daily chart at right, some of its top holdings like Kansas City Southern (KSU) and Union Pacific Corp. (UNP) are looking just as vulnerable for further downside.

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